Securities and Exchange Commission v. Nadel et al

Filing 1285

MEMORANDUM in support re 1272 Order on motion to stayOrder on Motion for Order to Show CauseOrder on Motion for Leave to File Receiver's Supplemental Brief filed by Burton W. Wiand. (Attachments: # 1 Exhibit Exhibit A - SEC v Nadel Hearing Transcript of 03-22-17 Hearing)(Maglich, Jordan)

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EXHIBIT A    1 1 2 IN THE UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA TAMPA DIVISION 3 4 5 6 7 8 9 SECURITIES AND EXCHANGE COMMISSION, ) ) Plaintiff, ) ) ) Case No. vs. ) 5:09-CV-00087-T-26MAP ) ) ARTHUR NADEL, et al., ) ) Defendant. ) 10 11 ____________________________________________________________ 12 13 MOTION HEARING BEFORE THE HONORABLE RICHARD A. LAZZARA UNITED STATES DISTRICT JUDGE 14 15 16 MARCH 22, 2017 10:53 A.M. TAMPA, FLORIDA ____________________________________________________________ 17 18 19 20 21 22 Proceedings recorded by mechanical stenography, transcript produced using computer-aided transcription. ____________________________________________________________ 23 DAVID J. COLLIER, RMR, CRR 24 FEDERAL OFFICIAL COURT REPORTER 801 NORTH FLORIDA AVENUE, 7TH FLOOR TAMPA, FLORIDA 33602 25 2 1 APPEARANCES: 2 3 For the Plaintiff: Robert K. Levenson Securities & Exchange Commission 801 Brickell Avenue, Suite 1800 Miami, Florida 33131 (305) 982-6300 For the Receiver Burton W. Wiand: Gianluca Morello George Guerra Wiand Guerra King, PL 5505 West Gray Street Tampa, Florida 33609-1007 (813) 347-5100 For Respondent Byron W. Hatchett: Byron W. Hatchett (pro se) P.O. Box 3374 Abilene, Texas 79604 For Respondent John Hatchett Carney: John Hatchett Carney (pro se) 10541 Berry Knoll Drive Dallas, Texas 75230 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 ALSO PRESENT: 21 Burton W. Wiand 22 23 24 25 3 1 P R O C E E D I N G S 2 - - - o0o - - THE COURT: Madam Clerk, would you please call the 5 THE CLERK: Yes, Your Honor. 6 This is Case Number 8:09-CV-87-T-26TBM, Securities 3 4 case. 7 Exchange Commission versus Arthur Nadel, et al. and Burton 8 Wiand, receiver, versus Quest Leasehold -- Leaseholder. THE COURT: 9 10 All right. Counsel, would you please state your appearances. MR. MORELLO: 11 Good morning, Your Honor. 12 Gianluca Morello on behalf of the receiver, the receiver is 13 here as well, and my law partner, George Guerra, from 14 Wiand Guerra King is also here. 15 MR. LEVENSON: 16 THE COURT: 17 MR. CARNEY: 18 19 20 Gentlemen? Your Honor, John Carney, appearing pro se. MR. HATCHETT: THE COURT: 22 MR. HATCHETT: 24 25 Byron Hatchett, appearing pro se, Your Honor. 21 23 Bob Levenson on behalf of the SEC. Are either of you lawyers? Yes, sir, I'm licensed in the Northern District of Texas as well as the State of Texas. THE COURT: you represent? All right, Mr. Hatchett. And who do Are you representing anybody in this matter 4 1 besides yourself? MR. HATCHETT: 2 Besides myself, no, Your Honor, and 3 I have never represented to anybody, whether -- at any time 4 that I represented anybody other than myself as a mineral 5 owner. 6 THE COURT: All right. Thank you. 7 Now, I received an e-mail yesterday from 8 Ms. Bedell, my law clerk. Mr. Morello, she says that you 9 had called her and that the Railroad Commission through the 10 Texas Attorney General will not be showing up and does not 11 oppose the motion. MR. MORELLO: 12 The call that I received from the 13 representative of the Texas Attorney General's office on 14 Tuesday, I believe, or Monday, was that he had spoken to -- 15 it was Mr. Shelton, was his name, he had spoken to the 16 Railroad Commission, he wasn't 100 percent affirmative but 17 he said he did not think they were going to take a position, 18 and if they were going to, they would file something and 19 notify us, and I haven't heard anything from them. 20 THE COURT: 21 MR. MORELLO: 22 I haven't heard anything either. So the last indication I had was that they were not taking a position on this motion. THE COURT: 23 Well, the dispute, it seems to me, and 24 you correct me if I'm wrong, is whether this lease is still 25 in effect. 5 1 MR. MORELLO: 2 THE COURT: That is the up -Mr. Carney and Mr. Hatchett say -- 3 everybody have a seat -- say it ended, what, in April of 4 this year? 5 receiver, Mr. Wiand, takes a different position. 6 it? That's what they say. 7 MR. MORELLO: 8 THE COURT: 9 MR. MORELLO: 10 13 14 15 What is That's correct. What's your position? Our position, Your Honor, is that the lease has essentially a provision that allows it to -THE COURT: 11 12 And apparently the clause? What do you call it, a habendum Did I pronounce it right, Mr. Hatchett? MR. HATCHETT: I believe that's correct, Your Honor. THE COURT: So even though the term of the 16 five years technically ends, if certain steps are taken it 17 continues on. 18 MR. MORELLO: 19 THE COURT: That's correct. Okay. Well, I want to ask you this. 20 Of course, Quest is kind of separate and apart from the 21 other relief defendants, correct? 22 23 24 25 MR. MORELLO: It was brought in later. It's part of the same receivership, but, yes, it was -THE COURT: Well, we're only interested in the people who supposedly lost money in Quest; is that correct? 6 1 We're not going to distribute any of its assets to the 2 other -- 3 MR. MORELLO: No, that's incorrect, Your Honor. 4 So the way the process is going to work is the majority of 5 Quest was funded with money from our scheme. 6 THE COURT: 7 MR. MORELLO: $6 million, right? And I believe it's a 60 percent 8 stake or somewhere close to 70 percent. So when the Quest 9 assets are sold, the proceeds will come in and they will be 10 distributed pro rata among Quest's creditors, essentially. 11 The largest creditor will be this receivership estate, so a 12 distribution will be made to this receivership estate, which 13 will then distribute the money to the Arthur Nadel victims. 14 All of the other Quest investors who filed claims will then 15 get a pro rata distribution as well from the Quest proceeds. 16 THE COURT: How many people does that equate to? 17 MR. WIAND: Judge, there's over -- 18 THE COURT: Have a seat, Mr. Wiand. 19 MR. WIAND: I think we have over 100 claims filed Have a seat. 20 with respect to what I would call the Downey victims, and my 21 thought on this was -- and as you know, I'm creating this 22 essentially as a separate receivership. 23 THE COURT: That's what I thought, yeah. 24 MR. WIAND: And that one of the claims filed in it 25 that I'm going to consider, I'll probably recommend to the 7 1 Court, is that we do pro rata with respect to the money that 2 came out of the Nadel victims and the money that came out of 3 the Downey victims. 4 THE COURT: Well, what assets does Quest have? 5 MR. WIAND: Quest has three leases, Judge, and 6 plus a lot of equipment and a house. 7 THE COURT: What's the total value, do we know? 8 MR. WIAND: The total value is a little over 9 2 million, I think. During this period of time I have been 10 actively attempting to liquidate this thing. Indeed, I have 11 on the table a proposal that I just received that would 12 hopefully close April 10th to get rid of the leases. THE COURT: And that would include the Hatchett 15 MR. WIAND: It would, Judge. 16 THE COURT: -- as an asset? 17 MR. WIAND: It would, Judge. 18 THE COURT: Have you discussed this with 13 14 19 20 lease -- Mr. Hatchett and Mr. Carney? MR. WIAND: Early on, Judge, we advised not 21 Mr. Hatchett, we advised his father, and we also advised 22 Mr. Carney what we were doing with respect to these leases 23 and that the program was that we were going to maintain the 24 properties, look for a competent investor/operator who would 25 be able to operate these leases for the benefit of paying 8 1 for them for the investors and then operate them so that the 2 leaseholders are -- the landowners or mineral rights owners 3 would begin to again receive money from the operation of the 4 leases, and I think that the group that I'm currently 5 receiving things from is such a group that has definitely 6 the power to do that. 7 THE COURT: 8 MR. CARNEY: 9 The answer is no, Your Honor. The answer is no, they have not. 10 THE COURT: 11 MR. CARNEY: 12 Mr. Carney? He hasn't? They have not discussed this potential sale or any potential sale with us. 13 THE COURT: Who did you talk with, Mr. Wiand? 14 MR. WIAND: I was present when Mr. Guerra 15 described this to Mr. Carney a number of years ago. With 16 respect to each individual offer -- this has been a saga, 17 Judge, with oil prices going up and down, trying to get this 18 thing sold, but I've had a couple of deals that have come in 19 and I have not -- some of them have walked away, one of them 20 I even got to the point of preparing a motion for the Court 21 and then it fell apart, and I haven't had a specific 22 conversation with Mr. Carney about this, I have had a 23 conversation as late as yesterday with a number of the other 24 mineral owners about what I was doing with this and they 25 said, fine, go forward with it. 9 1 THE COURT: Who? 2 MR. WIAND: Mr. -- 3 MR. MORELLO: 4 Peter Gryska was the individual we spoke to yesterday. MR. WIAND: 5 He was speaking to us on behalf of 6 himself and his brothers and others, who own a significant 7 portion of this. 8 THE COURT: Of the Hatchett lease? 9 MR. WIAND: Yes. 10 THE COURT: Do you know Mr. Gryska? 11 MR. CARNEY: 12 of the Hatchett lease, Your Honor, and he is our cousin. 13 THE COURT: 14 MR. CARNEY: 15 Have you talked to him? I have not heard anything about a sale from counsel or Mr. Gryska. THE COURT: 16 17 Mr. Gryska owns a very small portion Assuming Mr. Wiand was able to find -- have a seat and just relax. Assuming Mr. Wiand was able to find someone to 18 19 purchase the assets and that person was a reputable person, 20 would that satisfy -- by the way, how many people are 21 involved with regard to the Hatchett lease? 22 are there? 23 MR. CARNEY: How many people Your Honor, there are less people 24 than there were two years ago. Mr. Hatchett's father has 25 passed, my father has passed, and -- 10 1 2 THE COURT: And I assume that your fathers left their rights to you two? 3 MR. CARNEY: 4 MR. HATCHETT: 5 THE COURT: 6 MR. CARNEY: 7 8 9 10 Yes. That's correct, Your Honor. All right. So who else? Gryska? The Gryskas, Sarah Tucker, Janece. Jim Hatchett is probably the single largest owner. THE COURT: And how is he related to you, Mr. Hatchett? MR. HATCHETT: 11 THE COURT: 13 MR. HATCHETT: He is my father's brother, Your Honor. 12 He is my uncle. All right. It would be -- Sarah Hatfield 14 probably owns the largest portion, probably a third of the 15 Hatchett minerals. 16 17 THE COURT: And there's no one person that speaks for all of you? 18 MR. CARNEY: 19 MR. HATCHETT: 20 MR. CARNEY: 21 22 23 24 25 No, sir. No, sir. There are 27 separate leases, Your Honor, and if the activity -THE COURT: Wait a minute. What do you mean by 27 separate leases? MR. CARNEY: There's 27 separate leases that are required to be held by production if not within the primary 11 1 term. 2 intact, that's all they could potentially be holding at this 3 point. THE COURT: 4 5 So at most there's 1/27th of the original lease You've lost me. I thought there was just one lease that all of you signed. MR. CARNEY: 6 It's 27 separate tracks leased, and 7 they each have to be held separately, either during the 8 primary term of five years or by production after the 9 five year period, and if one section is held, it doesn't 10 hold the entire lease, it only holds the 1/27th. THE COURT: 11 12 me now. MR. CARNEY: 13 14 THE COURT: That's the But there's only one Hatchett -- there's only one lease, correct? MR. CARNEY: 17 18 I'm sorry, Your Honor. way the lease is written. 15 16 I must admit, you've kind of confused There's one written document, Your Honor. 19 THE COURT: 20 MR. CARNEY: 21 THE COURT: 22 MR. CARNEY: Yes. But you're telling me that there are 27 separate entities? 23 One written document. 24 25 27 separate parcels leased under that lease. THE COURT: Okay. But -- 12 MR. CARNEY: 1 2 160-acre section. 3 THE COURT: 4 MR. CARNEY: 5 THE COURT: MR. CARNEY: 9 THE COURT: MR. CARNEY: No, sir. Well, what if someone wanted to come They have to negotiate with each owner. 13 THE COURT: 14 MR. CARNEY: 15 THE COURT: 16 We go back to my original statement. in and re-lease these 27 separate parcels? 11 12 The minerals are owned jointly and There's no one who speaks for everyone? 8 10 And who owns -- who are the people -- severally by the Hatchett-Gryska-Carney family. 6 7 One well only holds one section, one With each owner? Yes, sir. Why do you contend the lease has expired? MR. CARNEY: 17 Your Honor, the lease expired because 18 there was no production after the five years to hold the 19 lease, there was no activity to hold the lease. 20 remain unplugged. 22 23 The liabilities are substantial. THE COURT: 21 The wells What liabilities are you talking about? MR. CARNEY: Well, the well plugging liabilities. 24 And in my response, Your Honor, I identify a toxic oil spill 25 that's very problematic and unfinished roads and 13 1 road damage. Substantial liabilities, Your Honor. 2 THE COURT: Mr. Morello? 3 MR. WIAND: Can I speak to it, Judge? 4 THE COURT: Yeah, go ahead, Mr. Wiand. 5 MR. WIAND: Your Honor, with respect to the lease, 6 it provides a number of different ways that the lease is 7 held. 8 was coming out until February of 2016. 9 time we began efforts to begin drilling on the property, There was some minimal production that came out -After that period of 10 which also the lease indicates if we're doing -- if we're 11 moving forward with drilling, if that's the case -- we even 12 went to the extent of, you know, identifying the locations, 13 doing the geology, and then we even filed with the Railroad 14 Commission and received a permit to drill the well and we 15 sent a check to Mr. Hatchett that was required by the lease 16 prior to beginning any drilling, and that's when all this 17 started. 18 THE COURT: Which Mr. Hatchett did you send it to? 19 MR. WIAND: I think it was sent to Byron Hatchett, 21 THE COURT: Did you receive a check, Mr. Hatchett? 22 MR. HATCHETT: 20 23 I believe. Your Honor, I have not received a check. 24 THE COURT: Did it go to your father? 25 MR. HATCHETT: My father was deceased in 2014 and 14 1 2 3 I doubt very seriously it went to him. MR. WIAND: Excuse me, Judge. I'm sorry. It went to Mr. Carney. 4 THE COURT: 5 MR. CARNEY: Mr. Carney? Your Honor, we settled a check up on 6 sale of proceeds from before the receivership that were held 7 in suspense because Mr. Bill Hatchett, Sr. had contacted the 8 purchaser of the oil from Quest but before the receivership 9 and the monies were held in suspense. After protracted 10 negotiations with the receiver, we agreed to split the money 11 50/50, he took half, we took half. 12 from before the receivership, and any representation that 13 this constitutes production during the receivership is a 14 false statement. 15 MR. WIAND: This was sale proceeds Judge, I think we're passing in the 16 night here. The lease requires prior to drilling that you 17 have to provide a check in the amount of $1,800 or $2,000 18 prior to beginning that drilling. 19 Mr. Carney. That check was sent to 20 MR. CARNEY: I have received no such check. 21 THE COURT: Well, has the check been negotiated? 22 MR. WIAND: It has not been negotiated, but we 23 definitely -- we definitely sent it, and I've got -- 24 Mr. Rizzo is the one who did it, he can testify to you that 25 he sent it. At any rate, shortly after that is when we 15 1 started -- when we first realized that they had a commercial 2 interest and had found somebody that they wanted to work 3 with to work this lease. We've had no feedback or adverse interest from 4 5 anybody other than these two gentlemen of all the 6 leaseholders, and we have, you know, included reports that 7 have been filed, and we've also had a claims -- a claims 8 motion, and nobody made a claim in the claims motion. 9 you know, we've been moving forward with doing -- with doing 10 that and we believe that the activities that we were engaged 11 in were significant to maintain the lease, and prior to -- 12 prior to beginning and leading up to this proceeding we 13 hadn't heard otherwise from anybody. THE COURT: 16 He's mentioned some liabilities, MR. WIAND: 14 15 So, Judge, with respect to oil properties Mr. Wiand. 17 and leases, and there are a lot of old wells out here, there 18 are provisions with respect to -- from the Railroad 19 Commission that there is obligations with respect to 20 plugging of wells, and we are in compliance with the 21 Railroad Commission's regulations on that. 22 posted with respect to the plugging obligations. 23 Railroad Commission visits these properties on a regular 24 basis, knows exactly what we're doing and has raised no 25 concerns with respect to that, and we have been meeting our We have a bond The 16 1 plugging obligations as they are required, and anybody that 2 we would bring in to continue this lease would also assume 3 those obligations and continue with them. 4 red herring. It's a 5 THE COURT: How about the roads he's mentioned? 6 MR. WIAND: The roads -- this is a very large 7 property. We received some pictures that there were some 8 tracks in a piece of a road. 9 and our supervisor, Mr. Chad Gray, is here and can speak to The individual who is on-site 10 that. 11 nature, but -- and there are also deer hunters, family 12 members with four wheelers and folks of that nature out 13 there on the roads. 14 back, you know, with respect to us that we've done any 15 significant damage to a road, and these are just a farm road 16 out in the middle of wide open spaces and they picked a 17 picture of one spot in a road. 18 significant deterioration of any of those roads that relates 19 to us. 20 It might have been after a rain or something of that There is nothing that can be traced There has been no There's also something in these papers that 21 somehow that we have polluted some -- I've lost the name of 22 the lake, but some lake, that there has been some spillage 23 with respect to that. 24 respect to any of those -- with respect to the oil industry, 25 there's always a little bit of stuff that goes on, but we Mr. Gray will testify to you with 17 1 regularly clean that up, and with respect to this lake we 2 supposedly polluted, it's 85 miles away from where any of 3 our activities are, so it just didn't occur. 4 THE COURT: Yes, Mr. Carney. 5 MR. CARNEY: Your Honor, the waste tank that's 6 attached to our pleadings is an illegal tank, it was 7 improperly, grossly, negligently constructed, and when it 8 rained it flushed out -- it flushed out down the hill, it 9 went into the creek, the creek flows into Possum Kingdom 10 Lake. 11 hill, and there was heavy rains this year. 12 illegal, all right? 13 not lined. 14 the very thing that happened. 15 The watershed into the deep creek is right down the But the tank is It was not properly constructed. It's It doesn't have a two foot berm on it to prevent The lease provides that they are obligated to 16 prepare and maintain all-weather roads. 17 obligation to not just not damage the roads but to make them 18 all-weather roads, which means caliche, gravel, they're to 19 surface the roads. 20 additional damages under the lease. 21 22 23 That's not been done. THE COURT: It's an affirmative Those are Well, how do we know it was done under Mr. Wiand's tutelage and not the Downeys? MR. CARNEY: 24 I didn't understand. 25 THE COURT: How do we know -- I'm sorry, again? The Downeys were Quest, right? 18 1 MR. CARNEY: 2 THE COURT: 3 Yes, sir. They executed this lease on behalf of Quest, right? 4 MR. CARNEY: 5 THE COURT: They acquired the lease, yes. Okay. How do we know that it wasn't 6 their actions that damaged the roads with regard to this 7 tank? 8 9 MR. CARNEY: to do this. They've had three years, Your Honor, This was done during the last three years. 10 I took the pictures. 11 THE COURT: 12 He's the supervisor? 13 MR. WIAND: He is, Judge. 14 THE COURT: Bring him up. 15 MR. WIAND: Okay. 16 THE COURT: Madam Clerk, would you swear him. 17 THE CLERK: Yes, Your Honor. 18 Please raise your right hand. 19 Do you solemnly swear or affirm that the testimony Well, let me hear -- Mr. Gray is what? 20 you're about to give will be the truth, the whole truth and 21 nothing but the truth, so help you God? 22 THE WITNESS: 23 THE CLERK: 24 25 Yes, I do. And please state for the record your name and spell your first and last name. THE WITNESS: Michael C. Gray, M-I-C-H-A-E-L. MICHAEL C. GRAY - DIRECT 19 1 You said spell my last name or first name? 2 THE CLERK: 3 THE WITNESS: 4 THE CLERK: 5 Yes, please. G-R-A-Y. Sorry. Thank you, sir. You may have a seat in the witness box. THE COURT: 6 All right. Mr. Morello, go ahead. 7 - - - - - 8 DIRECT EXAMINATION MICHAEL C. GRAY 9 BY MR. MORELLO: 10 Q Mr. Gray, could you please identify your connection and 11 sort of your work duties with respect to Mr. Wiand on behalf 12 of Quest. 13 A 14 on and I just kind of oversee the -- on the grounds, 15 everyday basis of Quest for Mr. Wiand, for the receivership. 16 Q 17 regular course of your regular day on behalf of Quest, what 18 kind of activities were you engaging in? 19 A 20 properties. 21 It's just to check everything, all the producing wells, 22 every day, gauge tanks, you know, clean up messes if we got 23 a little mess or fix a flow -- fix things that are broken, 24 little roustabout work, just maintenance and checking 25 things. I worked for Quest prior to the receivership and I stay Okay. And what were your specific job duties? In the Myself and another fellow, we just oversee the We call it -- we pump. We call it pumping. MICHAEL C. GRAY - DIRECT 20 1 Q Is it fair to say that you were overseeing, you know, 2 the operations of drawing oil or gas out of the wells on -- 3 A Yes. 4 Q -- the Hatchett lease? 5 A Yes, sir. 6 Q And let's start with 2015. 7 with the Hatchett lease? 8 A Yes, sir. 9 Q And the Hatchett land? 10 A Yes, sir. 11 Q Okay. 12 activities you engaged in with respect to, you know, the 13 property that's subject to the Hatchett lease. 14 A 15 works the wells over, fixes things that -- they had been -- 16 the wells were not producing before that, we went in there, 17 we pulled the tubing, fixed the tubing and put them back 18 into production to produce. 19 October of '15. 20 Q That was in October, 2015? 21 A Yes. 22 Q And were you successful in making the wells produce 23 oil -- 24 A 25 we did successfully get them to produce. You're familiar obviously Beginning in 2015, can you explain what kind of We had a workover rig, which is a pulling unit that I want to say that was in We did get -- the number 1 well and the number 5 well, MICHAEL C. GRAY - DIRECT 21 1 Q And how long did oil flow from those wells after you 2 successfully got them to produce? 3 A 4 have an injection well that is on the property that we 5 dispose of our wastewater, you essentially collect the gas 6 and you collect the oil and the injection well is for 7 disposal of the wastewater, and when we injected -- we were 8 injecting into that and then we had a problem with the 9 injection well, so we had to shut down, go over and work on We started producing them and after a few days -- we 10 the injection well. 11 Q Okay. 12 A It was -- that was in October, when we worked on it, 13 initially worked on the injection well, 2015. 14 Q 15 drawing any more oil out of any of these wells? 16 A 17 injection wells always flow back fluid when you work on 18 them, and usually they'll initially flow back oil and then 19 they'll turn to water, and as we -- as we were flowing it 20 back, we noticed it never -- never switched back to water, 21 so it obviously had a head built up on it, so we run a 22 flow line from the injection well to the oil tank and just 23 started flowing oil into the oil tank from the injection 24 well. 25 Q Do you recall approximately when that happened? And after October of 2015, were you successful in While we were working on the injection well, it -- And how much oil was -- how long did that -- how long MICHAEL C. GRAY - DIRECT 22 1 did the oil flow? 2 A 3 about 40 -- 40 or so barrels of oil into the tank. 4 Q So this started roughly in October of 2015? 5 A Yes, sir. 6 Q So approximately when did it stop flowing? 7 A In January, I believe, January of 2016. 8 Q And after the flow stopped, did you do anything else 9 with respect to these existing wells? It flowed for about four months real slow, but in total 10 A We had to get another workover rig in February because 11 we had a problem with the tubing on the ejection well, so we 12 brought a rig back in February and we pulled it again and we 13 run a sub with a collar so the pipe wouldn't try to push 14 out, because we had pressure on the well, and after we put 15 it back together, I thought because we had pressure we might 16 be able to flow some more oil, so we put it back online and 17 tried to flow it back into the oil tank, and it -- overnight 18 it flowed about a half a barrel and it just -- it died out, 19 no more pressure. 20 Q 21 recall? 22 A 23 I believe. 24 Q 25 talking about, they fall under the definition of a workover And what timeframe was that, that this occurred, do you I believe that was in February. I think mid February, Is it fair to say that all these activities you've been MICHAEL C. GRAY - DIRECT 23 1 of a well? 2 A 3 you've got a rig, it's a workover. 4 Q 5 recall what you and the receiver did next with respect to 6 the property covered by the Hatchett lease or these wells 7 specifically? 8 A 9 a well, and so we kind of started trying to put things Well, I mean, yes, the rig that we have over there, if And after the last episode in February, 2016, do you Well, we had always discussed trying to possibly drill 10 together to figure out where we would like to drill a well. 11 We spoke with the geologist that had done some of the 12 studies out there and we got him to find the location. 13 We had surveyors come out, they surveyed and I believe 14 staked a spot to drill. 15 out of Albany, Texas that owns a drilling rig. 16 waiting list as far as to start drilling. 17 permit, I believe, in place, the drilling permit through the 18 Railroad Commission, and I had some other vendors lined out, 19 we were good to go, and then we had to stop. 20 Q And do you know why you had to stop? 21 A I just got a call from Burt's office that said, 22 you know, hold off on it, because there was some 23 interference with the landowners. 24 Q 25 allowing us to continue drilling? I personally talked to Dean Lowe I was on his We had the So your understanding was that the landowners were not MICHAEL C. GRAY - DIRECT MR. CARNEY: 1 2 24 Your Honor, this is calling for hearsay. THE COURT: 3 I'll overrule the objection. 4 BY MR. MORELLO: 5 Q You can answer the question. 6 A I was told from Burt's office not to come out there 7 until this was resolved. 8 Q Okay. THE COURT: 9 THE WITNESS: 10 11 And what was -- THE COURT: 13 THE WITNESS: 15 That was in I think July. July or August maybe. 12 14 When was that, Mr. Gray? Let me ask you a question. I'm sorry. That's the best I can recall. THE COURT: That's all right. So July or August 16 of 2016 you receive instructions from the receiver to stop 17 whatever you're doing. 18 THE WITNESS: It might have been -- it might have 19 been September. 20 I can't really remember, but I know -- yes, sir. 21 22 I think it might have been later, I'm -- THE COURT: instructions from Mr. Wiand to stop doing what you're doing. 23 THE WITNESS: 24 THE COURT: 25 But in any event, you received Yes. And what is it that you were doing that he told you to stop doing? MICHAEL C. GRAY - DIRECT 1 THE WITNESS: Oh. 25 Well, we had it lined out to 2 start drilling. I did go out there, not on an everyday 3 basis, but every so often, maybe twice a month, three times 4 a month, and just over -- just kind of made a roundabout 5 look to make sure -- because everything was shut in, just to 6 make sure that there was no leaks or, you know, nothing 7 catastrophic was going on there, and so -- and then also we 8 had -- we had the drilling rig lined up to show up, 9 I believe it was going to show up within the next two weeks 10 to drill a well. 11 step onto the property. 12 I was told to just halt on that and not THE COURT: Okay. So sometime in July, August, 13 September, you stopped all your activities and you quit 14 going on the property? 15 THE WITNESS: 16 17 18 than summer. I believe it might -- it was -- THE COURT: But in any event, after you got that instruction -- 19 THE WITNESS: 20 THE COURT: 21 THE WITNESS: 22 THE COURT: 23 It may have been later than then, Yes, I did. -- you quit going on the property? Yes. And no one connected with you went on the property? 24 THE WITNESS: 25 THE COURT: No, sir. All right. Go ahead. MICHAEL C. GRAY - DIRECT 26 1 BY MR. MORELLO: 2 Q 3 longer go on the property, was there any Quest equipment 4 that had been left on the property? 5 A Yes. 6 Q Do you know the approximate value of the equipment that 7 was left behind on the Hatchett land? 8 A 9 range. Did you -- at the time you were told that you could no It's going to be in the 200,000 to 225,000 dollar That's equipment that is associated with the lease. 10 I have a pipe trailer with some pipe on it that was left 11 there from when we worked on the last well that we worked 12 on, it's still on the location. 13 there, it's not there, but -- 14 Q 15 property in the tank that was pumped during the time that 16 Quest had access to the land? 17 A 18 tank maybe. 19 Q 20 sort of terminated at some point when you were told to stop 21 entering the land sometime in the fall of 2016, and you 22 described them as working towards drilling a new well, when 23 did that -- when did that all sort of start being discussed 24 with the receiver, the implementation of that plan? 25 A I've had to leave that And how about was there any oil left behind on the I believe there's a total of 70 barrels or so in the I'd have to look. Now, the activities that you were just describing that Well, we had discussed drilling a well from day one of MICHAEL C. GRAY - DIRECT 27 1 the receiver, I mean, on the Hatchett, because we had -- 2 that was kind of the plan and that's what -- the 3 information -- some of the information was already there on 4 drilling the well. 5 trying to figure out what we wanted to do as far as drilling 6 a well. 7 Q 8 leave the land idle at any point? I mean, we had always discussed it, Did you ever believe the receiver intended to at all MR. CARNEY: 9 THE COURT: 10 Objection, Your Honor. Speculation. I'll overrule the question. 11 A Repeat the question. I'm sorry. 12 Q I was asking if you believe the receiver at any point 13 intended to leave the land idle and not do anything with it. 14 A No. 15 Q I think earlier we were talking about some of -- some 16 allegations relating to pollution, and I think there was a 17 discussion about a waste tank that Mr. Carney, I believe, 18 said was not in compliance. 19 A 20 pits. 21 covered, bermed completely. 22 for workovers, you do not have to have them lined, you do 23 not have to have them bermed. 24 It's not an illegal pit, not according to the Railroad 25 Commission, and that's who -- I go by their rules, Railroad Not intended to, no. The waste tank is -- if it's a -- we call them workover A drilling workover pit requires you to be plastic A workover -- a workover pit That was a workover pit. MICHAEL C. GRAY - DIRECT 28 1 Commission rules. It's not an illegal workover pit. 2 Q 3 the Hatchett land, approximately how many pits were there 4 that had been made by you or anyone else on behalf of Quest? 5 A 6 that's left on there. 7 Q Had there been more pits earlier in time? 8 A Oh, I'm sure there's been pits at every location on the 9 place over the years, several. And at the time that you were told no longer to enter I believe there's a partial one, one and that's it, 10 Q Okay. Well, did you personally create any pits? 11 A Personally, I've created pits, yes. 12 Q Okay. 13 A We sucked them out and then -- had them sucked out and 14 buried them, just remediated them. 15 Q Did you ever leave any oil or waste or anything else -- 16 A No. 17 Q -- in those pits? 18 A No. 19 Q And you said you covered those pits? 20 A Yes. 21 Q And so at the time -- again, I believe you testified 22 before, but just so I'm clear, at the time you were told to 23 no longer enter the land in the fall of '16, how many pits, 24 open pits, do you believe still existed? 25 A What did you do with those pits? I believe there was a partial one. MICHAEL C. GRAY - DIRECT 29 1 Q With respect to the roads, what was the condition of 2 the roads at the time that you were told to no longer enter 3 the Hatchett land? 4 A 5 of the roads are just dirt, and if it rains you can sink 6 that deep (indicating). 7 under good but not poor. 8 Q Who else used those roads? 9 A I'm sure anybody associated with the ranch used the Some of the roads are gravel, harder gravel roads, some I mean, I would say overall they're 10 roads. There's deer hunters that would use the roads. 11 I mean, of course, the oil people would use the roads, but 12 the family members, there's -- I don't -- I'm thinking 13 there's four or five, I don't know how many exactly of 14 landowners that own different properties on the ranch 15 itself, and each landowner has, you know, cattle people that 16 will be there, deer hunters that will be there, I don't know 17 exactly how many, but there's more than just the oil people. 18 Q 19 activity that was being done on behalf of Quest? 20 A Yes. 21 Q I think there were allegations of contamination. 22 Are you familiar with any allegation -- with any actual 23 contamination that had happened because of any of the 24 operations that you were engaged in on behalf of Quest? 25 A So there's other activity on the land besides the There was -- if there was a contamination that had MICHAEL C. GRAY - DIRECT 30 1 gotten into Possum Kingdom Lake, I mean, I probably would 2 not even be here, I would probably be in jail, or somebody 3 would. 4 The EPA would not -- I mean, that's just -- that's a no-no. 5 It would have been on every news -- they would have shut 6 every road down in the way. 7 source, so I don't know how we determine -- how anybody 8 determined that pollution got in a lake 80 miles away. 9 Q That lake was 80 miles away, you said? 10 A Right about it. 11 Q During the time that you were operating on behalf of 12 Quest, did the Railroad Commission ever indicate to Quest or 13 to you that there was any spillage or contamination issues? 14 A 15 Railroad Commission as far as contaminants. 16 received a letter from them or any other -- any other way. 17 Q 18 monitoring the Hatchett property or any other oil property? 19 A 20 property regularly. 21 even shut-in leases to producing leases, they have a 22 schedule that they routinely go around and they do 23 monitoring. 24 Q 25 had found any problems with any of the wells that are That's not going to happen. I mean, it can't. I mean, that's a major water No, as far as I know we're not in any violation with I have not Do you know whether the Railroad Commission would be I don't know how often, but they do monitor every oil They come by and do inspections of -- And is it your understanding if the Railroad Commission MICHAEL C. GRAY - DIRECT/CROSS 31 1 controlled by Quest, Quest or the receiver would have been 2 alerted? 3 A 4 it was in the time that we're here and it takes to get a 5 letter here, you know, a week or so, but -- 6 Q 7 that you were instructed to no longer enter the land, is it 8 your understanding whether Quest or the receiver were in 9 violation of any of their plugging obligations? They have not or we would have been notified. Unless With respect to the plugging of any wells, at the time 10 A Plugging obligations, no, we're not in violation. 11 We're up to -- to all of the standards on that. MR. MORELLO: 12 13 I don't have any other questions, Your Honor. 14 THE COURT: Mr. Hatchett? 15 MR. HATCHETT: Thank you, Your Honor. 16 - - - - - 17 CROSS-EXAMINATION OF MICHAEL C. GRAY 18 BY MR. HATCHETT: 19 Q 20 lease? 21 A Yes, sir. 22 Q And you've been out there for a good while? 23 A Yes, sir. 24 Q You're aware of a lot of the things that go on? 25 A Yes, sir. Chad, you're the pumper out there on the Hatchett MICHAEL C. GRAY - CROSS 32 1 Q Prior to your working with the receiver, you worked for 2 Quest? 3 A Yes, sir. 4 Q That was the Downeys? 5 A Yes, sir. 6 Q And you pumped the wells? 7 A Yes, sir. 8 Q Have many of those wells were shut in? 9 A How many of the wells were shut in when -- 10 Q How many total wells are on the Hatchett lease? 11 A There are, I believe, 11 total holes. 12 Q 11 well bores? 13 A Well bores, yes. 14 Q Of those well bores, how many of them are active? 15 A Today? 16 Q Today. 17 A Zero. 18 Q None of them? 19 A Uh-uh. 20 Q Okay. 21 were active? 22 A 23 prior to receivership? 24 Q 25 took over the lease. And when Quest had the lease, how many wells We activated the -- when Quest -- are you talking about I'm talking about prior to the receivership, when Quest MICHAEL C. GRAY - CROSS 33 1 A We had, I believe, the one well, the number 5 well, the 2 A-2 well, the -- I'm trying to count them in my head so I'll 3 get you a total count. 4 So I think we activated four wells during the Downeys' 5 version of Quest or whatever -- 6 Q 7 had four wells? 8 A We did operate the lease with four wells, yes. 9 Q And at some point when the receiver took over those The -- I believe the S-3 well. So when Quest was actually operating the lease, they 10 wells were shut in? 11 A 12 not long, but they shut in during the Downey era. 13 Q 14 shut in was in 2013, that was after the receiver? 15 A I'm -- I don't know. 16 Q At the present time are there -- prior to the -- let me 17 just go back. 18 A Okay. 19 Q Prior to that, were there any wells that were in 20 production? 21 A 22 of the lease until our injection well did go down. 23 Q And how much oil did you sell off that? 24 A Well, we didn't sell -- you have to have a whole -- you 25 have to have a total load before you can sell. No, they shut in long before the receivership. Okay. I mean, But there was one well, the last well that was The lease expired April the 15th, 2016. We did produce the 1 and the 5 prior to the expiration You can't MICHAEL C. GRAY - CROSS 34 1 sell oil partly, so -- 2 Q Was it in paying quantities? 3 A I'm sorry? 4 Q Was the production in paying quantities? 5 A Well -- 6 Q I believe you said that one of the wells flowed back a 7 half barrel. 8 A 9 40 barrels too. Well, that was the same one that flowed back the That was the same well. 10 Q Okay. But that was an ejection well. 11 A Yes. 12 Q That's not a production well. 13 A It's -- yes. 14 Q And it doesn't have a P4 production license, it's an 15 injection well, right? 16 A Yes. 17 Q According to the Railroad Commission, you can't count 18 that as production -- 19 A It's recoverable. 20 Q -- is that correct? 21 A It's recoverable. 22 production or not. 23 Q 24 not production. 25 A I don't know if you can count it as I have no idea. Well, it didn't come from a production well, so it's Okay. I don't know how the Railroad -- I don't know. MICHAEL C. GRAY - CROSS 35 1 Q After the receiver took place, was there any oil or gas 2 sold off the Hatchett lease? 3 A Before or after? 4 Q After the receiver took over, was there any oil or gas 5 sold -- 6 A 7 receivership took over. 8 Q And that was produced during the Quest time? 9 A Yes. 10 Q Those tanks were filled when the Downeys had it? 11 A Yes. 12 Q So that production took place before the receivership 13 took place? 14 A Yes. 15 Q When the receiver was in control, was there any oil and 16 gas produced off the Hatchett? 17 A I mean -- 18 Q You're the pumper. 19 didn't. 20 A 21 I don't know the law, if I can call it produced or not. 22 I don't know how that goes. 23 part. 24 Q 25 you have the oil -- Yes. Yes, there was 170 barrels, I believe, sold after Either you produced some or you Not from anywhere other than the injection well. I'm not familiar with that Well, I asked if it was sold. You're the pumper. Did MICHAEL C. GRAY - CROSS 36 1 A It was not sold. 2 Q Did the oil gatherers come get the oil? 3 A No, we did not sell any. 4 Q Okay. 5 didn't gather any oil or gas? 6 A No. 7 Q Okay. 8 time that the receiver had the lease; is that correct? 9 A And so the gas production, the gas gatherer So there was absolutely no production during the There was no production out of a producing well. There 10 was produc -- I mean, I don't know how to -- 11 Q No production sold. 12 A Not sold. 13 Q Okay. 14 A Wells shut in. 15 Q Okay. 16 A Um-hum. 17 Q And without production, what could possibly perpetuate 18 the lease beyond the primary term? 19 A I mean, I don't know. 20 Q Would it be drilling activity? 21 A Drilling activity would, yes. 22 Q Right. There was no production sold? And the wells were shut in? Now the lease has expired. Now, I understand that ya'll plan -- 23 MR. MORELLO: 24 THE COURT: 25 MR. MORELLO: Objection. Sir? I'm not sure -- he hasn't MICHAEL C. GRAY - CROSS 37 1 established that Mr. Gray knows the terms of the lease and 2 what would actually constitute satisfaction of the clause 3 that extends the term of the lease. THE COURT: 4 5 the lease? THE WITNESS: 6 7 No, I'm not, sir. I have no dealings with the actual lease itself. THE COURT: 8 9 Do you know -- are you familiar with Mr. Hatchett. I think the objection is well-taken, Plus that's an issue for me to decide. 10 BY MR. HATCHETT: 11 Q 12 would call the crude buyers? 13 A Yes. 14 Q And did you call the crude buyers to come pick up 15 oil -- 16 A No. 17 Q -- during the time of the receivers? 18 A During the time of the receivers, yes, I did. 19 sold 176 barrels during the time of the receiver. 20 Q Now, the 176 barrels -- 21 A One hundred seventy something. 22 Q -- you're talking about was produced during the time of 23 the Downeys? 24 A Yes. 25 Q Yes. Okay. As the pumper, aren't you in control of when you Yes, we MICHAEL C. GRAY - CROSS 38 1 A But I did call them during the receivership era. 2 Q Okay. 3 A Yeah. 4 Q So during the receivership era you called and had that 5 crude oil picked up? 6 A Yes, I did. 7 Q But it was not produced during the time of the 8 receivership? 9 A That is correct. 10 Q Okay. 11 A Yes. 12 Q Okay. 13 well? 14 A Yes. 15 Q And they applied for a drilling permit? 16 A Yes. 17 Q Did they ever stake a location? 18 A Yes. 19 Q Did they build the pits? 20 A No. 21 to get on location. 22 Q 23 the 26th, 2016 for the permit? 24 A 25 did. So you do know about that information? Now, you said that they had planned to drill a We -- we got shut down right prior to being able So you did this -- you made your application September I'm not sure. I didn't file for the permit, the office MICHAEL C. GRAY - CROSS 39 1 Q If it was done on September the 26th, 2016, it would be 2 five months after the expiration of the lease; is that 3 correct? 4 A Yes, it would be. 5 Q And would you agree that you got notice from, I guess, 6 Mr. Wiand that a letter had been sent October the 16th, 7 2016? 8 A 9 been sent, no. I don't think I had been informed that a letter had 10 Q But you were informed not to come back on the lease? 11 A This was after we filed for the permit and after all of 12 that. 13 I wasn't -- I wasn't aware of all the details of why. 14 Q 15 either you produce a well or you plug it? 16 way it is? 17 A 18 necessarily. 19 probably in the state of Texas than there are producing 20 wells. 21 Q 22 that you have to plug the well; you're aware of that? 23 A 24 paperwork for a 14(B) extension or something like that, 25 which -- Yes. I mean, I was informed not to come back, but Now, isn't it true in the oil and gas industry that You produce a well or you plug it? Isn't that the I mean, no, not I mean, there's a lot more unplugged wells So if you're not going to produce a well, the rule is You have to plug it if you don't have the proper MICHAEL C. GRAY - CROSS That's correct. 40 1 Q And if you don't have that extension, 2 you need to plug the well within 30 days? 3 A Yep. 4 Q If you have the extension, then you can extend it for a 5 year? 6 A 7 can have X amount of wells on your 14(B) extension and you 8 either have to plug a percentage of what's on your extension 9 a year or put back into production a percentage, and we're I believe so. Yes, the 14(B) extension rule is, I believe, that you 10 in compliance with our 14(B) extension, to my notice. 11 Q 12 permit was applied for to extend the plugging of the wells; 13 is that correct? 14 A I have no idea. 15 Q You don't know? 16 A No. 17 Q You don't know if Mr. Wiand filed any kind of extension 18 to plugs wells with the Railroad Commission? 19 A No, I don't know. 20 Q Yes. 21 A Okay. 22 Q But isn't it also true you have to have a valid lease 23 in order to get an extension? 24 A 25 field guy. Well, I understand that a drilling and a plugging I don't know about that. On the Hatchett? I don't know. I have no idea. No. I don't know how -- I'm more of a As far as paperwork goes, I know a little bit MICHAEL C. GRAY - CROSS 41 1 but not a whole lot. I don't know. 2 Q 3 passed? 4 A I do agree with that. 5 Q And the lease was to be expired on that date? 6 A I -- yes. 7 to that, but, yes, that's my belief, that it was prior -- 8 Q 9 shut in and there's no production? But you do agree that April the 15th, 2016 has come and I've never, I mean, seen it in writing prior Your testimony to the Court now is all those wells are 10 A Yes, sir. Yes, there is none. 11 Q Now, as to the damages we're talking about, there was a 12 dirt pit on the well, you're aware of that? 13 A Yes. 14 Q And it had oil in it? 15 A I didn't see the oil -- I don't know when the pictures 16 were taken. 17 Q 18 If there's oil in that pit in those pictures, where did the 19 oil go? 20 A 21 we had it remediated, we had it sucked out. 22 there was all saltwater probably when we did a workover and 23 there would have been a skim of oil. 24 out. 25 been rainwater. I haven't seen oil in it, no. Well, I've just got to ask, where did the oil go? I've never seen oil in it. The oil we had in the pit, There was -- We sucked everything Any water that was in the pit after that would have I mean -- MICHAEL C. GRAY - CROSS Well, that's the point. 42 1 Q 2 and it filled the pit up and ran over the dike, and that's 3 what ran into Deep Creek, and Deep Creek is on the watershed 4 of Possum Kingdom. 5 A 6 I mean, whatever was in there would have had to have been 7 rainwater, that I'm aware of. 8 I mean, I would have known if there was a pollution issue. But there was no oil in the pit before the rain. MR. HATCHETT: 9 10 The oil -- the rainwater came I would feel like I -- Your Honor, may I approach the witness? THE COURT: 11 You may, sir. 12 BY MR. HATCHETT: 13 Q I have in my hand what was marked as Exhibit 1. 14 A Yes. 15 Q Do you recognize that? 16 A I don't know when it was -- I'm pretty sure this is 17 probably the 9-Q. 18 I mean, we did do workover -- the receivership did do a 19 workover on this well after the fact. 20 pit. 21 back, but -- 22 Q Is that oil in the pit? 23 A I don't know. 24 could be carbon sulfide or it could be -- I mean, I don't 25 know. I have no idea when it was taken. That's a workover We flowed -- when we did swabbing on it, we did flow I mean, I don't know what it is. It MICHAEL C. GRAY - CROSS 43 1 Q So you're saying you don't think that's oil? 2 A It could be. 3 picture. 4 I -- but I don't know when that -- was that picture taken 5 during a workover? 6 was oil in the pit at one time. 7 Q Now, we were talking about the roads. 8 A Yes, sir. 9 Q And you may not know what the provisions of the lease It could be. It's hard to tell in a I mean, it could be oil, it could be -- I mean, I don't know. I mean, I told you, there 10 are, but -- 11 A I do not know. 12 Q -- oil and gas leases normally provide that the 13 operator maintain the roads. 14 A Okay. 15 Q Is that correct? 16 A Um-hum. 17 Q And so the production zones in nearly all these other 18 wells have already had good caliche roads all the way to the 19 roads. 20 A Um-hum. 21 Q But that particular well didn't have an all-weather 22 road. Yes, sir. 23 MR. MORELLO: 24 THE COURT: 25 What's the basis? Objection, Your Honor. Can't read your mind, Mr. Morello. MICHAEL C. GRAY - CROSS MR. MORELLO: 1 2 THE COURT: Just ask the question, please, Mr. Hatchett. MR. HATCHETT: 5 6 I'm not sure who is testifying here, if it's Mr. Hatchett or Mr. Gray. 3 4 44 I'm trying to get him to understand where we are in regard to the lease. THE WITNESS: 7 8 BY MR. HATCHETT: 9 Q Yes, sir. Were there all-weather roads to this well that we see 10 here? 11 A 12 is not an all-weather road, no, it's just a pasture road, 13 yes. 14 Q 15 to maintain an all-weather road? 16 A Yes. 17 Q Not the responsibility -- And that would be the responsibility of the operator, Yes. MR. MORELLO: 18 19 If that is the 9-Q, if that's what well that is, there Q Objection, Your Honor. -- of the farmers or the ranchers or the deer hunters? 20 THE COURT: 21 MR. MORELLO: What's the matter, Mr. Morello? Again, he's testifying himself as 22 opposed to asking Mr. Gray -- Mr. Gray already testified he 23 didn't know whose responsibility it is to maintain the roads 24 under the lease. 25 now he's asking him -- Mr. Hatchett fed him that information and MICHAEL C. GRAY - CROSS THE COURT: 1 45 Well, do you know whose responsibility 2 it is to take care of the roads? 3 THE WITNESS: I don't know what the responsibility 4 is on the existing roads. 5 existing pasture road. 6 THE COURT: 7 THE WITNESS: If that -- that road was an How bad is the road anyway? I mean, it's -- it's just a dirt 8 lane in between mesquite trees. 9 at all, no, sir. 10 THE COURT: 11 THE WITNESS: 12 There's no material on it Can you travel it? You can travel it in a pickup truck, yes, sir. THE COURT: 13 All right. 14 BY MR. HATCHETT: 15 Q Is it an all-weather road? 16 A No, it's not an all-weather road. 17 Q So if we had a bad rain, you couldn't travel it? 18 A Probably not. 19 MR. HATCHETT: I have nothing further, Your Honor. 20 THE COURT: 21 MR. CARNEY: 22 May I approach? 23 THE COURT: 24 Who took it and when? 25 MR. CARNEY: Mr. Carney, do you have any questions? Yes, Your Honor, a few. Yes. Your Honor, I took it in the summer MICHAEL C. GRAY - CROSS 1 46 of 2016. 2 THE COURT: When? 3 MR. HATCHETT: 4 THE COURT: June or July. All right. 5 - - - - - 6 CROSS-EXAMINATION OF MICHAEL C. GRAY 7 BY MR. CARNEY: 8 Q 9 that well? When was the last time you pumped out the waste tank on 10 A In 2016, earlier probably. I don't -- I'd have to look 11 back. 12 Q 13 told to not go onto the Hatchett ranch property? 14 A Before October 14th of '15? 15 Q Of 2016. 16 A Of '16? 17 Q And do you know what triggered the instructions you 18 received from the receiver or the attorney to not go on the 19 road or not to go on the property? 20 A I think it was a dispute with the lease, I guess. 21 Q What activity occurred on the Hatchett ranch leases 22 between April 15th and October 14th, 2016? 23 A Between -- okay. 24 Q Between April 14th, 2016, when the lease expired, the 25 primary term -- I really don't know. Was there ever a time before October 14th that you were No. No, there wasn't. I -- Give me the dates again. MICHAEL C. GRAY - CROSS 47 1 A Um-hum. 2 Q -- and the notice for you to vacate the property on or 3 after October 14th, 2016. 4 A 5 I mean, that's basically -- pretty much, yeah, basically -- 6 Q Did you spud a well? 7 A The location had been set. 8 out and they staked it. Just trying to put together -- to drill a well. MR. CARNEY: 9 We had the surveyors come I object as nonresponsive. 10 Q What is the definition of spudding? 11 A Oh. 12 Q Yes, sir. 13 A I thought you said did we spot the well. 14 Q Did you spud the well? 15 A No, we did not spud the well. 16 Q All right. 17 September of 2016, was it? 18 A Probably. 19 Q And the extension that you contend relieves you of a 20 plugging obligation wasn't filed until the fall of 2016, was 21 it? 22 A 23 Today was the first day I've heard that, plugging extension. 24 Q 25 extension for plugging you have to file a valid -- you have Did we spud? No. The well application wasn't submitted until That's probably right. I don't know. I have no recollection of the plugging extension. And do you know whether or not in order to get an MICHAEL C. GRAY - CROSS 48 1 to represent to the Railroad Commission that you have a 2 valid lease? 3 A 4 question I answered to him. 5 Q So when did the well get staked? 6 A I want to -- I really don't know. 7 the -- I know it was staked in two thousand -- late 2016, 8 I believe. 9 Q The fall? 10 A Probably, yeah. 11 I'm not sure. 12 Q 13 equipment within 120 days of the end of the lease term of 14 April 15th, did you do that? 15 A We removed no equipment after the lease expired. 16 Q Were the pits fenced, or was the pit fenced? 17 A No. 18 Q Was it bermed? 19 A Partially. 20 Q Would you look at the picture again, please. 21 A I believe that's the berm here, coming back on the 22 back side, and there's a little bit of a berm over here, but 23 that's partially -- it's not bermed in the front. 24 Q Is there a two foot berm? 25 A No. I don't -- I don't know. I think that's the same I'm not sure. I'd have to look at The fall of '16? I'd have to look. I don't know. If the lease provided that you were to remove your Not all the way around, no, sir. MICHAEL C. GRAY - CROSS 49 1 Q Just so we're clear on the extent of the activity, 2 you've testified as to every action that was taken after 3 April 15th to extend the lease, correct? 4 else -- 5 A 6 I've stated everything that was -- that was done after -- 7 Q 8 lease after April 15th? 9 A Is there anything Well, I don't know if it was to extend -- I'm just -- You stated every activity that was done on the Hatchett Yes, I believe, other than paperwork issues and ongoing 10 things like that, but, yes. 11 Q 12 have or could have taken before October 15th, 2016? 13 A Not before -- not interfered with -- in the field, no. 14 No. No. 15 Q Let me show you what's been marked as Exhibit 2. 16 you familiar with that information? 17 A Yes. 18 Q And does it list the status of the active or 19 non-active? 20 A 21 you know, where does it show the status at? Did anybody interfere with any actions that you would Are These are the list of the wells. Status -- somewhere you may show me where it says -- Okay. 22 Shut-in date, it gives the date they were 23 shut in, so I'm assuming they're shut in, is what their 24 status is. 25 Q Is that consistent with your testimony that all the MICHAEL C. GRAY - CROSS 50 1 wells are shut in? 2 A Yes. 3 Q After April 15th, you've testified that there was one 4 well permitted and staked sometime in the fall of 2016. 5 A 6 100 percent when it was staked, but, yes. 7 Q Where was that well located? 8 A It was going to be the east side -- I mean, I don't 9 know how -- it's going to be due northeast of I believe that's when it was staked. I'm not 10 Bill Hatchett's house. 11 else understands where that's at, but pretty close to the -- 12 to the -- 13 Q Tank battery? 14 A No. 15 We're going to go northeast of Bill's house, maybe a mile or 16 so, I believe. 17 Q 18 activity on any other part of the ranch, correct? 19 A What time period are we talking? 20 Q We're talking about after April 15th, 2016. 21 A No. 22 Q Prior to April 15th, you testified there was only 23 activity as to, what, three wells, two production and an 24 injection well? 25 A No. No. I mean, I don't know that -- nobody To the power line that runs through. And other than that particular location, there was no No. Yes, sir. MICHAEL C. GRAY - CROSS 51 1 Q So all the other wells -- 2 A Four wells. 3 That's where I believe this is. 4 I can't -- that's the only place I know we had a partial pit 5 there, and I believe it's here, it was extended, but we did 6 do work on this well also. 7 Q 8 workover pit on the brownfield well? 9 A Does it -- I'm sorry? 10 Q Is it an accurate depiction -- is the picture accurate? 11 A I mean, it looks pretty close, I mean, yeah. 12 Q Do you recognize it? 13 A I believe I do. The 9-Q, we did -- we did work on it. I believe that's the 9-Q. Does the photograph fairly and accurately reflect the 14 MR. CARNEY: 15 THE COURT: 16 Yes, sir. Move to admit Exhibit 1, Your Honor. MR. MORELLO: Mr. Morello? I don't think there's -- I don't 17 think there's been sufficient foundation established for the 18 accuracy of the picture, but, I mean, I don't have any 19 objection to it being -- 20 THE COURT: 21 All right. MR. CARNEY: It will be received. Thank you, Your Honor. 22 BY MR. CARNEY: 23 Q You've driven to the brownfield well, haven't you? 24 A To the which well? 25 Q Well, the pit -- the waste pit well. MICHAEL C. GRAY - CROSS/REDIRECT This -- the well, if it is 9-Q, yes. 52 1 A I didn't know 2 where this road went. 3 Is that what you're saying? 4 Q I'm asking you do you recognize that road. 5 A I do not, but -- I mean, it just looks like a pasture 6 road. 7 this road is or not, but if you say this goes to that well, 8 I guess it does. 9 Q Is that where this road goes? I do not know -- I couldn't tell you if that's what We'll come back to that. Exhibit 2, do you have any reason to dispute the 10 11 accuracy of the shut-in dates on Exhibit 2? 12 A 13 they are. 14 Q Thank you. 15 A I'm not sure. I don't. I don't know -- I don't know how accurate I mean, I don't know. I'd have to -- 16 MR. CARNEY: 17 THE COURT: 18 MR. MORELLO: Nothing further, Your Honor. Do you have any redirect, Mr. Morello? I do, Your Honor. 19 - - - - - 20 REDIRECT EXAMINATION OF MICHAEL C. GRAY 21 BY MR. MORELLO: 22 Q 23 the permit application for the new well, roughly in the fall 24 of 2016. 25 A Mr. Gray, you were asked questions about the date of Yeah. MICHAEL C. GRAY - REDIRECT 53 1 Q Would there have been activities that would have taken 2 place before that permit application was filed? 3 A Would there have been activities before it was filed? 4 Q So the -- yes. 5 A Planning, and we did talk with the geologist and went 6 over the maps, went over what -- he had done some geology on 7 it, we went over that, I mean, just in preparation for 8 drilling a well. 9 Q So before September -- let's assume September, 2016 is 10 the accurate date for the permit application filing. Before 11 that application was there a survey done, would there have 12 been a survey done of the land? 13 A They did do -- 14 MR. CARNEY: 15 THE COURT: Objection. Foundation. I'll overrule the objection. 16 A They did do a survey, yes. A survey company surveyed 17 to find the location in adjacent to where it was on the map 18 in order to find it in real life to know where we're going 19 to drill, yes. 20 Q 21 generated before September 16, 2016? 22 A 23 Hatchett, yes, and it has reference to the well we were 24 going to drill, it was in relation to that, yes. 25 Q Do you know if the receiver had a geological report There was a geologic report done on part of the And do you know if drillers had been contacted before MICHAEL C. GRAY - REDIRECT 54 1 the application was filed in September, 2016? 2 A I did. 3 Q Can you think of any other activities that took place 4 before, relating to the same new well that would be drilled, 5 that the permit was applied -- that the permit was applied 6 for in September, 2016? 7 A No. 8 Q Besides yourself, do you know if there are any other 9 individuals that work with the receiver on Quest? I contacted a driller out of Albany, Texas. 10 A Are there any other individuals that work with the 11 receiver -- 12 Q With respect to the Quest operations, besides yourself. 13 A On the field? 14 Q No, just in general. In the field? Let me ask it this way. 15 Do you interact -- who do 16 you interact with on behalf of the receiver with respect to 17 the Quest operations? 18 A Roger Jernigan. 19 Q And have you ever interacted with Jeffrey Rizzo? 20 A Yes. 21 Q And are you aware of everything they do with respect to 22 Quest? 23 A No, not everything. 24 Q So they could have been taking additional steps as well 25 behind the scenes -- They do a whole lot that -- MICHAEL C. GRAY - REDIRECT 55 1 A Definitely. 2 Q -- with respect to the new well drilling, correct? 3 A Yes. 4 we had to get a Water Board letter. 5 file for the permit we had to get a Water Board letter, we 6 had to get -- I believe there was some more paperwork. 7 Everything has to be in line before you can even file for a 8 permit. 9 Q Roger had to contact the Water Board Commission, Before we could even One last area I want to ask you. Mr. Carney I think 10 raised the question about the pit being bermed and asking if 11 there was a two foot berm on one of the exhibits that he 12 showed you. 13 were dug and that were used were in compliance with all 14 regulations with regards to those pits? 15 A 16 be bermed, they don't have to be plastic, only drilling pits 17 have to be plastic, and some drilling pits don't even have 18 to be plastic. 19 Q 20 until you were told to stop, that you could no longer enter 21 the Hatchett lands, would you agree that the receiver was 22 actively engaged in attempting to drill a new well on the 23 Hatchett land? 24 A 25 Yes. Is it your understanding that the pits that When you dig a workover pit, they don't have to Would you agree, Mr. Gray, that from April 2016 forward Yes. Yes. MR. MORELLO: I have no other questions, MICHAEL C. GRAY - RECROSS 1 56 Your Honor. 2 THE COURT: 3 Any other witnesses, Mr. Morello? 4 MR. MORELLO: 5 THE COURT: 6 MR. HATCHETT: 7 10 No, Your Honor. Mr. Hatchett? I have no witnesses, but I would like to recross Mr. Gray. THE COURT: 8 9 Thank you, Mr. Gray. cross and redirect. Well, in my courtroom it's direct, What areas do you want to inquire, Mr. Hatchett? MR. HATCHETT: 11 Your Honor, I wanted to inquire 12 that when the saltwater injection well had its problem, what 13 actually took place in getting that under control. THE COURT: 14 15 Can you answer that question, Mr. Gray? 16 THE WITNESS: 17 THE COURT: 18 Ask the question, Mr. Hatchett. 19 I'm sorry? Have a seat again. I'll allow you some leeway. 20 MR. HATCHETT: Thank you, Your Honor. 21 - - - - - 22 RECROSS-EXAMINATION 23 BY MR. HATCHETT: 24 Q 25 saltwater blowing out of the wellhead? When the saltwater injection well had the problem, was MICHAEL C. GRAY - RECROSS 1 A No. 2 your protection, not the head. 3 Q 4 bradenhead, saltwater? 5 A 6 Yes. 7 Q 8 you got the call to come get it? 9 A 57 Okay. We had -- it come out the bradenhead, which is The bradenhead. Did it come out of the Yeah, it was coming out of the valve of the bradenhead. And do you know how long it had been doing that before No, I don't -- when I kicked the well on, it started 10 doing it the day I was there. I always go by and I kick the 11 well, the pumps on, to make sure that everything is going to 12 come on manually, because it's all an automatic system. 13 There was no -- nothing coming out of the bradenhead before 14 that, because there would have been a puddle. 15 well on, on manual, and while I was at the lease, we was 16 working -- working over stuff, we were fixing flow lines and 17 stuff, and while I was there is when it started coming out 18 of the bradenhead. 19 Q 20 Janece that saltwater was blowing out of that head? 21 A 22 tubing had shot -- it had lifted out, that's when we got the 23 rig in February, but there was nothing coming out of the 24 well, no. 25 went over there and pulled it back down. I kicked the So you didn't receive a phone call from my sister No, I did not. I received a call from Janece that the The tubing had lifted out from the pressure. We MICHAEL C. GRAY - RECROSS 58 1 Q But it did flow back saltwater onto the surface? 2 A No. 3 Q It didn't come out of the bradenhead? 4 A No, not that I recall. 5 there could have been a cupful maybe that was in -- in and 6 around the bradenhead when we worked over -- or when it -- 7 when the tubing come out and the fluid might have came 8 around the packing rubber or something. 9 Q Right. 10 A Yes, there could be, yes, but it was a very small 11 amount that I cleaned up as soon as she called me. 12 Q 13 saltwater didn't spray up? 14 A 15 probably three foot, and it was just -- it was not standing, 16 it was just in -- 17 Q 18 bradenhead, to come out of the wellhead? 19 A There was pressure. 20 Q Pressure? 21 A Yes. 22 Q And was it -- was it -- why didn't it just stay in 23 place? 24 A 25 we didn't pull a full stream back in until it was -- it was No. We -- it did not flow. I mean, there could have -- When people came out and the packing head was loose, It didn't -- it was contained within an area of What would cause the tubing to come out of the Was there some kind of problem with it? When we worked over the well, we started pulling back, MICHAEL C. GRAY - RECROSS 59 1 a light stream. 2 Q Okay. 3 A I didn't want a full heavy stream in the hole, so it 4 was a light stream, just because, being efficient-wise, we 5 were going to flow back anyway, there was no sense in 6 running a full stream back in. 7 Q 8 is problematic, causing problems? 9 A So what did -- what property -- So that saltwater well -- that saltwater injection well No. It was that time -- I put a perforated -- I mean, 10 I put a sub in above the top joint now and then rested it 11 against it so it will not come out of that hole again. 12 I should have done that the first time. 13 Q So it won't happen again? 14 A Yeah, it won't happen again. MR. HATCHETT: 15 16 Nothing further, Your Honor. Thank you. 17 THE COURT: All right. You're welcome. 18 Thank you, Mr. Gray. 19 Mr. Carney, do you have any witnesses? 20 MR. CARNEY: 21 THE COURT: Come forward and be sworn. 22 THE CLERK: Please raise your right hand. 23 Do you solemnly swear or affirm that the testimony Your Honor, I'd like to testify. 24 you're about to give will be the truth, the whole truth and 25 nothing but the truth, so help you God? 60 1 THE WITNESS: 2 THE CLERK: 3 MR. CARNEY: 4 THE COURT: I do. Please state your name for the record. John Hatchett Carney. Mr. Carney, before you begin, 5 Exhibit 5 to the receiver's motion is a letter on the date 6 of October 14th of 2016 that you sent to Mr. Guerra, 7 Mr. Morello and Mr. Wiand. 8 MR. CARNEY: 9 THE COURT: Do you remember that letter? Yes, sir. And in it you categorically state 10 in capital letters: 11 or anyone purporting to be acting on your behalf onto the 12 Hatchett Ranch is trespassing. 13 all rights to salvage any equipment or pipeline. You have forfeited any and On whose behalf were you making that 14 15 You are advised that any entry by you representation? 16 MR. CARNEY: 17 THE COURT: On my own. How about Mr. Jim Hatchett, 18 Byron Hatchett, Peter Gryska, Shannon Campbell, Sarah 19 Hatfield and Janece Tucker, did you have their authority to 20 send that letter to the receiver? 21 MR. CARNEY: 22 THE COURT: 23 I did this on my own, Your Honor. And this included all 27 of those parcels? 24 MR. CARNEY: 25 THE COURT: Yes, sir. Again, by what authority did you have 61 1 to tell the receiver to stay off the entire prop -- how much 2 of this property do you own? MR. CARNEY: 3 I own an undivided fraction of all of 4 the oil and gas minerals. 5 by us, the surface is separately owned by the various family 6 members, but the oil interests are undivided, so we each 7 have a small fraction of the royalty interest. 8 THE COURT: 9 MR. CARNEY: THE COURT: 10 11 The property is separately owned For the entire property? For the entire property. And how much of this property do you own? 12 MR. CARNEY: 13 THE COURT: 14 there any oil wells? 15 MR. CARNEY: 16 THE COURT: 17 MR. CARNEY: 18 19 20 1140 acres. All right. And on that 1140 acres are Yes, sir. Which ones? The one depicted in Exhibit 1, and the road -THE COURT: Oh. That road that you say was torn up, is that on your property? 21 MR. CARNEY: 22 THE COURT: 23 MR. CARNEY: 25 THE COURT: Okay. And that -- where the oil was, what did you call it? 24 Yes, sir. The working pit. Yeah. Is that on your property? 62 1 MR. CARNEY: 2 THE COURT: 3 Yes, sir. Is all the equipment that you claim they can't have on your property? 4 MR. CARNEY: 5 THE COURT: 6 MR. CARNEY: 7 THE COURT: Just some of it. Some of it. Some of it, the physical -Again, by what authority did you tell 8 the receiver to stay off the Hatchett Ranch when you don't 9 own all of the Hatchett Ranch? MR. CARNEY: 10 11 Ranch. 12 I don't own all of the Hatchett I own an undivided portion of all of the mineral interests. THE COURT: 13 14 I had entered in this receivership? 15 MR. CARNEY: 16 THE COURT: 17 MR. CARNEY: 18 I had been made aware of it -Why didn't you come to me? Your Honor, I didn't because the lease had expired. THE COURT: 19 20 Were you aware of the orders that But don't you understand that's my determination to make and not yours? Where is Mr. Gryska? 21 What's his position, do you 22 know? Is it his position the lease is expired, or any of 23 the other people other than you and Mr. Hatchett here? MR. CARNEY: 24 25 Campbell. I've discussed it with Shannon 63 1 2 THE COURT: Where is -- is it Mrs. Campbell? 3 MR. CARNEY: 4 THE COURT: 5 MR. CARNEY: 6 THE COURT: 7 MR. CARNEY: 8 THE COURT: 9 MR. CARNEY: 10 Yeah? THE COURT: Yes. Where is she today? It's a he. Shannon is a he. Where is he? He's in San Antonio. Did he know about this hearing today? I believe so. So you've told me and Mr. Hatchett, 11 who is a lawyer, has told me that you're only here in your 12 own individual capacities. 13 MR. CARNEY: 14 THE COURT: Yes, sir. How can I adjudicate the rights of the 15 other people who have interest in this property? 16 me how I do that. 17 18 19 MR. CARNEY: You tell Your Honor, they're the same -- the existence of the lease is the same as to everybody. THE COURT: They may come in and say, you know 20 something, I agree with Mr. Wiand's position, based on the 21 testimony of Mr. Gray, that prior to April 16th of 2016 the 22 receiver was taking action to drill a new well, et cetera, 23 that would bring it into the habendum clause. 24 that position. 25 They may take What do I do then? MR. CARNEY: Your Honor, the activity of the 64 1 receiver is -- doesn't even pale compared to what is 2 required to preserve a lease after the primary term. 3 THE COURT: 4 If I accept the credibility of Mr. Gray, it seems 5 That's my determination though. like he was acting prior to April 16th. MR. CARNEY: 6 Your Honor, it's a well-adjudicated 7 issue, and the level of activity that is required to 8 preserve a lease after the primary term isn't even clearly 9 or potentially met. THE COURT: 10 Again, how do I adjudicate the 11 interests of these other people? 12 receiver, if I believe you, Mr. Hatchett, stay off their 13 property? 14 MR. CARNEY: Or do I just tell the Well, Your Honor, the determination 15 of the validity of the lease is what we're asking -- that is 16 what -- what's brought us here today is Mr. Hatchett filed a 17 good faith request with the Railroad Commission to determine 18 whether the lease was valid. 19 around months after the lease expired. 20 for 120 days after the expiration -- 21 THE COURT: The receiver scrambled The lease provides I've read the lease. I've read the 22 lease, but do you understand the quandary that I'm in? 23 What if Mr. -- apparently, according to Mr. Wiand, he's had 24 contact with Mr. Gryska and he's all for someone else coming 25 in and taking over, which seems to me at odds with your 65 1 position and Mr. Hatchett's position. MR. CARNEY: 2 Your Honor, I think the testimony is 3 clear that of the 27 separate leases, there is only activity 4 at most on two or three tracks, so the -- all of the other 5 25 tracks no longer have a lease. 6 THE COURT: 7 Well, who owns those 25 tracks? MR. CARNEY: Well, one of them is mine. The 8 location that they're describing as being staked, I don't 9 know where that is, but it's apparently on either Byron 10 Hatchett's or his sister Janece's part of the ranch. THE COURT: 11 12 Is your sister aware of this situation? 13 MR. HATCHETT: 14 THE COURT: 15 Any reason why she didn't say, hey, brother, 16 She is aware, Your Honor. Any reason why she didn't come? represent my interests? You're a lawyer. 17 Do you understand the quandary I'm in? 18 MR. HATCHETT: I understand exactly the quandary 19 you're in, Your Honor, but I am not authorized to speak on 20 behalf of the other mineral interest owners. 21 THE COURT: And I know that and I appreciate that. 22 MR. HATCHETT: And the only reason that they would 23 be involved in this particular hearing is because someone 24 claimed that I did, and I didn't, and I don't think 25 Mr. Carney did. We were acting on our own. 66 1 THE COURT: Okay. 2 MR. HATCHETT: I understand. The issue of the oil and gas lease 3 has to do with the minerals, and it doesn't really matter 4 who owns the surface, but the minerals are undivided, and so 5 whatever argument that we have about the minerals being 6 released should be released one or all, joint and severally. THE COURT: 7 Well, what if Mr. Gryska comes in and 8 says, no, I disagree with your position, Mr. Hatchett and 9 Mr. Carney, or the other people? What more do you have to 10 add to me? 11 you've brought out -- and by the way, you've done a very 12 good job. 13 that facetiously. 14 your interests here. 15 16 Other than what Mr. Gray has testified and Are you sure you're not a lawyer? You've done a very good job representing MR. CARNEY: THE COURT: 18 MR. CARNEY: 20 Sir, with all respect, I would never violate a court order. 17 19 I don't say Okay. And the actions that I took, good faith response. THE COURT: Let's clear that up right now, and 21 I don't want to cut off the receiver. 22 anything that's been done here would rise to a level of 23 contempt, although I think you should have consulted a 24 lawyer before you sent that letter, all right? 25 I don't find that On an informal basis, do you know the position of 67 1 the other people involved with regard to the receiver's 2 actions of trying to sell the assets of Quest? 3 what their positions are? MR. CARNEY: 4 5 Do you know Your Honor, we buried Jim Hatchett's wife two weeks ago. 6 THE COURT: 7 MR. CARNEY: Well, I'm sorry to hear that. I had the occasion to discuss 8 generally with some of the family, including Mr. Gryska, and 9 Your Honor, these wells have been producing some revenue for 10 the family for 50 years, and the receiver has had three 11 years to do something with them and he did nothing, and 12 they've scrambled around at the end to try and fix their 13 problem, but they let the lease expire without doing 14 anything. THE COURT: 15 You didn't answer my question. 16 Assuming he can find a buyer for the assets of Quest that 17 would start generating revenue, do you know what the 18 position of the other people are? MR. CARNEY: 19 20 in there. 21 THE COURT: 22 MR. CARNEY: 23 Okay. They want to control the lease terms that are negotiated with the new person. THE COURT: 24 25 They want to get a qualified driller Mr. Wiand? Okay. Can that be accomplished, 68 MR. WIAND: 1 Your Honor, it absolutely can be, and 2 in my conversation with Mr. Gryska we talked about that and 3 he was also in favor of me going forward with this, and 4 I have on the table right now a proposal that the buyer 5 wants to close by April 10, that won't happen, but that's 6 what they're proposing, and it's acceptable terms to me, and 7 so I -- you know, and I believe these people are 8 well-qualified to do this business, so -- 9 THE COURT: What's their name? 10 MR. WIAND: It's called PROCONSULT International 11 LLC. It's a group of petroleum consultants that invest and 12 operate properties for investors. 13 THE COURT: Are you aware of them? 14 MR. CARNEY: 15 THE COURT: 16 MR. HATCHETT: 17 THE COURT: Where are they from, Mr. Wiand? 18 MR. WIAND: The five principals are from various No, sir, I've never heard the name. Mr. Hatchett? I'm not aware of them, Your Honor. 19 places, some from Calgary, there's a couple in Texas, and 20 there's some in other parts of the United States. 21 THE COURT: Well, assume, you know, I agree with 22 your position and I say the lease is terminated, who are you 23 going to go to? 24 MR. CARNEY: 25 MR. HATCHETT: Your Honor -Your Honor, if I might be 69 1 permitted? 2 THE COURT: Sure. 3 MR. HATCHETT: Yes, sir. There's an old adage, if you want 4 things done right, do it yourself. 5 expire. 6 that is willing to lease the Hatchett lease today. 7 will not do so unless we get a release from the lease from 8 the receiver. 9 Court that no one will love the land or take care of it 10 The lease is about to I myself went and put together an investment group They I will be the operator, and I can assure this better than myself. THE COURT: 11 But, you know, that's all well and 12 good, what about these people who want their money back, the 13 claimants? 14 MR. HATCHETT: Well, I understand their position. 15 Our family has also suffered collateral damage because we 16 have had an income stream cut off from us. 17 to this Court that I have discussed this with my uncle, my 18 cousins, every one has agreed to sign a lease with me upon 19 the release of this oil and gas lease. 20 reported to me from Peter Gryska, Jim Hatchett, Sarah 21 Hatfield and all the other mineral owners. 22 waiting for is a release. 23 I would purport That was what's been All we're We had a situation where this lease was coming to 24 a close, and the receiver has done nothing to perpetuate 25 this lease beyond the primary term, and when it terminated, 70 1 we waited, because the lease calls for 60 days they're to 2 give us a release; this they did not do. 3 there's no production, they need to plug the wells, but they 4 have an extension, but -- the extension was made in December 5 of 2016, but they didn't have a valid lease, and they -- 6 I believe that's one of the exhibits, I think number 3 in 7 the response, but if they don't have a valid lease, they 8 have nothing to sell, it's evaporated. And then since 9 I understand at one time it was a very important 10 asset for the receiver and for the SEC, but their inaction 11 caused this lease to lapse, and I don't know how they can 12 revive that. 13 leasing term or they are drilling a well at the end of the 14 primary term. 15 will not hold that lease unless they're actually drilling in 16 the ground, and nothing that they've done according to Texas 17 law would perpetuate this lease beyond the primary term. 18 Now, I understand the SEC is trying to recover Either they have production or they have the All the preparations they've talked about 19 funds for defrauded people and I think that's a noble cause. 20 Quest got involved in some regard, which I don't understand 21 how they were, but obviously they were part of this Ponzi 22 scheme; but for the receiver now to try to sell a 23 nonexistent lease to some other operator to me sounds like 24 fraud in itself. 25 THE COURT: Watch out, Mr. Hatchett. 71 1 MR. HATCHETT: 2 THE COURT: 3 MR. HATCHETT: 4 5 6 7 8 9 10 I understand, but -- Watch out. -- they can't sell what they don't have. THE COURT: I understand that. That's a decision I'll have to make. MR. HATCHETT: I understand. I understand that, Judge, and I'll -THE COURT: Why didn't you come to me first? MR. HATCHETT: Well, Judge, when they filed some 11 of the stuff they did with the Railroad Commission, they 12 availed themselves to their authority on how to conduct 13 business in the State of Texas. 14 I believe the lease is expired and there's no production, 15 and so I asked the Railroad Commission to do a good faith 16 claim hearing to determine whether or not they could do what 17 they were doing. 18 Commission said, you need to contact the receiver and find a 19 mutual date, a mutual date to have a hearing. 20 Mr. Guerra. 21 I questioned that because I asked for that, but the Railroad I contacted He would not give me a date. In the interim time, I reviewed your order and 22 I did a lot of study, and I contacted a lot of people that 23 were both -- one of them was a magistrate like yourself for 24 16 years in the Federal Court, and he said, you need to go 25 to the Federal Court, and so when the ball came back into my 72 1 court, into my side -- because in order to have a hearing 2 with the Railroad Commission I had to write a letter and I 3 had to fill out the form asking for that official hearing, 4 and this I did not do because I realized that the only place 5 that has the authority is sitting right here, and so when 6 they were filing the things with the Railroad Commission, 7 I was trying to counter that with the Railroad Commission, 8 but now I see that in order for the Railroad Commission to 9 make that determination would ultimately end up taking that 10 asset from them in their mind, and so I did not ask for that 11 hearing to be finalized, there was no hearing before the 12 Railroad Commission, because I realized that this is the 13 court of continuing jurisdiction and you have authority. 14 But I want the Court to understand that my entire 15 motivation in this is to be a good steward of what I've 16 inherited and to do right by the people that I care about, 17 my family, although I don't represent them in any kind of 18 legal capacity, but I still want to see good for them and 19 I want to see the collateral damage that's happened to them 20 in this entire problem to cease, and we would like to pursue 21 another course and try to get our minerals taken care of and 22 produced but to have the land taken care of. 23 well bores that need to be plugged, and if they don't have a 24 valid lease and they don't have a valid plugging extension, 25 they need to plug the wells. We have ten 73 1 Now, the truth of the matter is, since this is a 2 receivership, similar to a bankruptcy, all the receiver 3 would have to do is send a letter to the Railroad Commission 4 and say that Quest does not have the money in its estate to 5 plug these wells. 6 them on what they call the orphan well program and the wells 7 would be plugged by the taxpayers of Texas. 8 9 The Railroad Commission would then put Now, I'm concerned because I have two of the well bores on the land that I have inherited, one of them is a 10 problematic saltwater well and the other one is just open, 11 and those things need to be addressed. 12 is that steel and saltwater don't mix very well, and the 13 longer there's inactivity, the more problematic it becomes 14 that something bad is going to happen. 15 those wells need to be plugged. 16 The reality of it It's my opinion that Now, the group that I have put together are 17 willing to drill ten new wells, new casing, new cement, 18 everything. 19 40 years old, they were first drilled in the '70s, and 20 they're old, they're wore out, and as far as I'm concerned 21 they're no longer a viable asset, because you can never 22 bring them back online after the inactivity that's taken 23 place over the last three years and I will say five or six 24 years prior to that. 25 problematic and they need to be plugged. The wells that are in place now are over But these wells are old, they're That's my concern 74 1 2 as a landowner. As a mineral owner, I want to see my minerals 3 developed, I want to see benefit to my family, and the last 4 four operators, Your Honor, have been less than prudent in 5 taking care of things. 6 So my motivation here is to preserve the land, 7 protect it, and to be a good steward of my inheritance and 8 to try to develop those minerals. 9 I know that because it's a receivership situation 10 there's no way to sue for tortious interference of business 11 or things of that nature, but we can bring this matter to a 12 close if the receiver would simply realize that they have 13 lost the term of the lease and they did nothing to 14 perpetuate it. 15 thing that will really perpetuate it beyond the primary 16 term, and if they're going to claim some kind of activity, 17 they actually have to be digging in the ground, under Texas 18 law, to preserve that. 19 or even staking a well or putting a location or making 20 application for a permit is simply not enough. 21 There's no production. That's the only Just preparation as far as planning So what we would ask, one, is leave of court to 22 either file this with the Railroad Commission to make that 23 determination or for this Court to make the determination 24 that this lease has in fact come to an end and then let us 25 continue on with life. 75 1 2 THE COURT: So the Railroad Commission has the authority -- 3 MR. HATCHETT: 4 THE COURT: 5 6 Well, the Railroad Commission -- Has the authority to say this lease is or is not valid? MR. HATCHETT: I don't believe they have the 7 actual to say whether it's valid or not, but they can 8 determine whether or not they have a good faith claim, 9 either they have term or they have production, and I believe 10 the answer would be, yes, they would determine whether it's 11 a good faith claim. 12 THE COURT: All right. 13 MR. HATCHETT: This Court also has that ability 14 and can read the lease and see, but the Railroad Commission 15 is the governing body that determines oil and gas matters. 16 There's some other discrepancies that's been filed 17 that are concerning, and maybe that's at a later date to 18 take that up, but they made extensions to plug these wells 19 making claims that aren't true, or what I believe are not 20 true, and so they wouldn't be entitled to the plugging 21 extension, and I think that's really the crux of the matter. 22 THE COURT: 23 MR. MORELLO: Mr. Morello? Just -- I'll be brief, Your Honor, 24 but going back to the original issue about the lack of 25 authority Mr. Carney or Mr. Hatchett have to act on behalf 76 1 of the other interest holders, Mr. Gryska, who as we 2 mentioned before is one of the interest holders, sent my 3 firm an e-mail on March 14th. 4 I'm going to quote two short paragraphs, it says: 5 I have never -- and he puts "never" in all caps -- appointed 6 or asked neither John Carney nor Byron Hatchett to be my 7 attorney or representative. 8 Hatchett and told John Carney the same, that he not -- "not" 9 in all caps -- proceed with any independent deals concerning Included in the e-mail, and Lastly, I specifically asked Byron 10 the Hatchett lease until the bankruptcy court and the 11 receiver had released the leases in writing. 12 and I spent two years and thousands of dollars dealing with 13 and extricating ourselves from our cousin John's IRS lawsuit 14 and do not wish to be embroiled with him nor Byron again. 15 My brothers So I think that pretty much makes clear that 16 Mr. Carney and Mr. Hatchett do not have the support of all 17 of the lienholders. 18 While Mr. Hatchett and Mr. Carney are in a 19 position where they are feeling the effects of the 20 receivership, as anyone that has any connection to the 21 receivership, unfortunately that's the way these things play 22 out, that's the way these frauds play out, and there's a 23 claims process which they have not availed themselves of 24 through which they could seek any redress they believe 25 they're entitled to, but one thing that the order makes 77 1 clear is that they're not entitled to engage in self-help, 2 and that's precisely what has happened. 3 Bill Hatchett, Mr. Hatchett's father, stepped into 4 the officer of the receiver the first time the receiver made 5 a trip to this part of Texas, the Quest office, and 6 Mr. Hatchett at the time made it clear that he was going to 7 take things into his own hand in an effort to pull back the 8 lease from the receivership. It started right off at the beginning when, back 9 10 in 2013, the same year the receiver was appointed, there had 11 been some oil that had been -- some of this oil that we're 12 discussing here that had been collected, typically there's a 13 company called Transoil that sells the oil and then pays 14 off -- the short of it is pays off all the interest holders. 15 Mr. Bill Hatchett went to Transoil and told them that this 16 Hatchett lease had been terminated and that the receiver had 17 no right to anything. 18 proceedings and efforts by the receiver and the attorneys 19 with my firm to come to some sort of resolution with the 20 Hatchetts, and I think it's made clear from the record that 21 we have countless times pointed them to paragraph 15 of the 22 order that enjoins anyone from disturbing receivership 23 assets. 24 25 That required two years of So I think, you know, part of the reason that we are here today -- and I know Mr. Hatchett now recognizes the 78 1 Court's authority, but this is four years later. 2 times we've indicated to them that the order limits their 3 ability to act -THE COURT: 4 5 Why hasn't more oil been produced, Mr. Morello, during this period of time? MR. MORELLO: 6 7 Countless I think the receiver can answer that. 8 THE COURT: All right. 9 MR. WIAND: Your Honor, as you'll recall, when 10 this was brought into receivership, I essentially had a 11 separate receivership over this. 12 my representation to the Court that I was not going to 13 utilize the assets from the other part of the receivership 14 in order to support this thing, so we have been managing and 15 operating this -- these oil properties in that light. 16 It was the Court's -- and We have been undertaking various different steps 17 with respect to this property in light of the fact of the 18 funds and assets that were available to do it. 19 testified early on, we attempted a workover, we attempted 20 subsequent workovers to try to get wells producing. 21 done in a way, frankly, that was to try to get this 22 producing and to -- and to do it in a way -- in light of 23 what the capital was that I had to put into it. 24 25 As Mr. Gray It was The last portion of what we did is after it was determined that that injection well was not going to produce 79 1 more oil, we had been advised and consulted with geologists 2 that we could drill some shallow wells without significant 3 expense and begin production at that point in time, and 4 that's what we proceeded to do beginning in March, April, 5 whatever, preparing to drill those wells. But, Judge, these are old wells. 6 I think 7 Mr. Hatchett is right, the wells that exist there have been 8 around for a long time. 9 producing with them, the expense or the likelihood of With respect to reworking and 10 production from them was not great, other activities need to 11 be engaged in, and that's the reason I have been continually 12 working to try to bring in an appropriate operator with 13 appropriate funds in order to do what might bring more oil 14 and production for these people out of this -- out of this 15 property. THE COURT: 16 17 He mentioned that there are ten wells that, what did you say, need to be capped? 18 MR. CARNEY: 19 THE COURT: 20 MR. HATCHETT: 21 Plugged. Plugged? Yes, Your Honor, there's ten open well bores that need to be plugged. MR. WIAND: 22 And those ten open well bores that 23 need to be plugged have probably been in that situation for 24 20 years. 25 the Downeys' time, and they were that way when the -- when They certainly were in that situation throughout 80 1 the receivership became -- administering these properties, 2 and I take issue with the fact, with respect to the Railroad 3 Commission, that we have done anything inappropriate with 4 respect to that Railroad Commission in advising them what we 5 were doing, posting a bond and complying with the 6 requirements with respect to our plugging operations, and if 7 my present proposal goes through, that new operator, or if 8 he takes over this operator, will undertake those 9 responsibilities and continue going with it. 10 11 12 13 14 So I think this -- this plugging thing is a bit of a red herring. THE COURT: All right. Well, Mr. Morello, they claim the lease expired on April 16th of last year. MR. MORELLO: Well, we believe, based on the 15 testimony of Mr. Gray, that sufficient activity has been 16 taking place from before and after the lease expired, or the 17 original five year term expired, to trigger the provision 18 that allows it to continue, to remain in the hands of the 19 receivership. 20 THE COURT: 21 MR. MORELLO: Specifically? Specifically, ever since about March 22 or -- February or March of 2016 the receiver has been taking 23 steps to drill a new well, and drilling is one of the 24 activities that triggers the additional time period. 25 THE COURT: Well, but it says lessee is then 81 1 engaged in drilling or reworking operations. 2 taking steps to drill but never drilled. 3 MR. MORELLO: You were Well, there's -- Your Honor, there 4 are specific things that have to take place before the 5 drilling could occur, and that was -- there was no physical 6 drilling, that's correct, Your Honor, but there were steps 7 taking place at the time to be able to begin drilling, 8 including getting the permit and geological survey and all 9 those other things. 10 MR. CARNEY: There's no ambiguity in this 11 language, Your Honor, and at best they would hold three 12 tracks, three 160-acre tracks, 480 acres, or approximately 13 10 percent of the ranch, is all they could possibly hold if 14 planning constituted sufficient habendum clause activity to 15 perpetuate the lease, and it doesn't even come close, and if 16 the Court is going to make a determination on it, we'd like 17 to be able to brief the status of the Texas law and the 18 requirements of the habendum clause, because it's crystal 19 clear, it's been litigated for 100 years, and the -- well, 20 since the '30s, when it came, so 70 years. 21 But the planning -- the clause wouldn't have any 22 meaning if thinking about doing something was sufficient 23 activity to be doing it, because everybody could say they 24 were thinking about it. 25 MR. MORELLO: It's not -- it's clear. Your Honor? 82 1 THE COURT: 2 MR. MORELLO: Yes. Can I quote the specific language 3 under which we're operating? 4 than -- 5 THE COURT: 6 MR. MORELLO: It's a little bit broader All right. Go ahead. And specifically -- and this is in 7 paragraph 5 of the lease. If after the expiration of the 8 primary term of this lease, and after oil or gas is produced 9 from said land, which had occurred during the main term of 10 the lease, the production thereof should cease from any 11 cause, this lease shall not terminate -THE COURT: 12 13 Where are you in that paragraph 5? MR. MORELLO: 14 15 Wait a minute. sentence. Let's see. It's the second full It's the second clause that begins with an "if." 16 THE COURT: 17 MR. MORELLO: All right. I see it. So going back to where I left off, 18 this lease shall not terminate if lessee commences 19 operations for drilling or reworking production thereof. 20 I'm sorry, for drilling or reworking within 60 days after 21 the cessation of such production. 22 So our contention is the activities that were 23 taking place satisfied the "commences operations for 24 drilling" language of this document. 25 THE COURT: All right. Let's do this. 83 MR. CARNEY: 1 2 Your Honor, that's 60 days. They have -- 3 THE COURT: Hold on, Mr. Carney. Hold on. 4 All right. I don't find anything has been 5 presented to me which would justify me issuing order to show 6 cause to Mr. Hatchett and Mr. Carney or anybody else, 7 all right? 8 9 So that motion is denied. The motion for leave to file suit for damages and declaratory relief, I'm going to deny that. However, I'm 10 a little concerned about the issue of this lease, and it 11 would seem to me that Texas law governs with regard -- 12 habendum, right? 13 MR. CARNEY: 14 THE COURT: Yes, sir. So I'm going to give everybody a 15 chance to brief this issue. 16 an important issue to the -- not just to the receiver, but 17 the defrauded people and also to Mr. Carney and 18 Mr. Hatchett. 19 It's an important issue. It's You know, I'm still -- Mr. Hatchett -- or, 20 Mr. Carney, what was Mr. Gryska referring to in his e-mail 21 about you and some IRS lawsuit? 22 MR. CARNEY: 23 Your Honor, I had a 30 year battle with the IRS over a tax shelter from 1984. 24 THE COURT: 25 MR. CARNEY: 1984? Yes, sir. 84 1 THE COURT: 2 MR. CARNEY: 3 THE COURT: 4 MR. CARNEY: 5 Is that lien still there? No, I paid that off in September of THE COURT: Were you aware there was a lien, MR. WIAND: No, Your Honor. Mr. Wiand? 8 9 Well, they filed a lien on the ranch. last year. 6 7 And how is he involved? I don't know who they might have noticed that to, but I was not aware that it had 10 been liened, otherwise, Judge, if I would have known they 11 were liening my interest, I probably would have been back to 12 see you, so -- 13 THE COURT: 14 MR. CARNEY: 15 All right. They sued Mr. Gryska too, that's why he got it. 16 THE COURT: 17 Did they sue everybody who had an interest in the 18 Hatchett lease? MR. CARNEY: 19 20 Well, I would imagine. That was related to me directly, yeah. 21 THE COURT: What's your relation to Mr. Gryska? 22 MR. CARNEY: 23 THE COURT: 24 MR. HATCHETT: 25 THE COURT: He's my first cousin. And to you, Mr. Hatchett? He's a second cousin, Your Honor. Okay. All right. How much time do 85 1 you want to brief the issue? 2 MR. CARNEY: 3 THE COURT: 4 MR. HATCHETT: 5 trial schedule. Two weeks. Mr. Hatchett? Your Honor, I have a pretty heavy I would ask for more time than two weeks. 6 THE COURT: 7 MR. HATCHETT: 8 I have a manslaughter case that's coming up that's 9 All right. THE COURT: 11 MR. HATCHETT: 12 THE COURT: 13 MR. HATCHETT: 14 THE COURT: 16 17 Can we have four weeks? going to require -- 10 15 How much time? You do criminal defense work? Sorry? You do criminal defense work? Yes, sir. Texas is unique. The jury sets the sentence, don't they? MR. HATCHETT: You can go either to the judge or the jury, Your Honor. 18 THE COURT: That's an elective that you make? 19 MR. HATCHETT: 20 THE COURT: 21 MR. HATCHETT: It's an elective that you can make. That's interesting. If it please the Court, I've tried 22 three jury trials this year, I have two more this coming 23 month, so I have a heavy trial schedule. 24 THE COURT: All right. 25 THE CLERK: 22nd, Judge. Well, is today the 23rd? 86 1 THE COURT: 22nd? 2 MR. WIAND: Your Honor, if I might add, with 3 respect to what I'm doing with respect to these folks that 4 made a proposal to me, I have never been in this 5 receivership less than open with anybody who wanted 6 information about what we were doing or whatever. 7 of these gentlemen have ever contacted me for any reason. 8 I'll be happy to share with them what we're doing and I'll 9 be happy to put them in touch with these people to see if 10 Neither that's what it is, that might ease things. 11 I know the briefing process is going forward, but 12 I just want to make sure they're quite aware that phones in 13 Texas will actually call Florida, and I'm there and I'm 14 ready to help them out and explain to them what I'm doing, 15 as I did with Mr. Gryska, sir. 16 MR. CARNEY: Your Honor, I've been in contact with 17 their lawyers for three lawyers now. 18 with the receiver, but I've dealt with the law firm for 19 three years. 20 THE COURT: So I haven't spoken Well, speak with the receiver. 21 I mean, this is a new development, all right? 22 to be objective and reasonable and act in good faith and 23 this may all resolve itself. 24 25 All right. Let's all try Everybody file their briefs no later than April 19th, and then I'll try to expedite it. 87 Now, what's going on on the property itself? 1 2 anybody -- 3 MR. CARNEY: 4 THE COURT: 5 MR. CARNEY: 6 9 Absolutely nothing. Is anybody overseeing it? It's -- there is family that lives on the property. THE COURT: 7 8 Is there? What about this equipment that's Is it deteriorating? MR. HATCHETT: Your Honor, due to the inactivity, 10 I believe that the equipment that they spoke of now has gone 11 from salvage to scrap. 12 the lack of proper maintenance, I believe that it is -- now 13 just needs to be hauled off and sold as scrap. 14 believe that the clause says that if they had 120 days from 15 the end of their lease to come and get it -- 16 THE COURT: 17 I'm afraid that the lack of use and But I do Well, that's assuming I find the lease ended on April 16th. 18 MR. HATCHETT: 19 THE COURT: I understand. What do you say to that, Mr. Morello? 20 Do you want to just leave the status quo, the property just 21 stays as it is? 22 MR. WIAND: Your Honor, Mr. Gray and the fellow 23 that works with him would be continuing to attend to the 24 matters on the lease except that we've been told to get off 25 the lease, and Mr. Gray said that he was told not to go back 88 1 there. That was my direction. This is out in Texas. 2 I don't want anybody saying that we're trespassing or 3 anything. 4 I doubt they're in harm's way, but I don't want them going 5 on there creating any problems. I don't want to put these people -- I mean, 6 THE COURT: 7 I'll endeavor to rule as quickly as I can. 8 can get your memos in before then, so be it. All right. 9 10 I'll just leave the status quo. Thank you. interesting. 11 MR. MORELLO: 12 MR. HATCHETT: 13 MR. CARNEY: 14 THE COURT: 15 It's been very Thank you, Judge. Thank you, Your Honor. Thank you, Your Honor. Have a safe trip back to Texas. 9-CV-87. 16 - - - - - 17 (Proceedings concluded at 12:42 p.m.) 18 - - - - - 19 20 21 22 23 24 25 If you 89 1 C E R T I F I C A T E 2 3 This is to certify that the foregoing transcript 4 of proceedings taken in a motion hearing in the United 5 States District Court is a true and accurate transcript of 6 the proceedings taken by me in machine shorthand and 7 transcribed by computer under my supervision, this the 30th 8 day of March, 2017. 9 10 11 /S/ DAVID J. COLLIER 12 13 DAVID J. COLLIER 14 OFFICIAL COURT REPORTER 15 16 17 18 19 20 21 22 23 24 25

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